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Solazyme Inc. Brings Hope With Unilever Deal

Can a deal to sell personal care ingredients save Solazyme Inc.?

Solazyme Inc.(NASDAQ:TVIA) is transforming itself into TerraVia, a company focused on algae innovation in food, nutrition, and specialty ingredients. And Monday's earnings release was the first time it really explained the transition and what TerraVia wants to become.

This is a strategic change that has been a long time coming. Solazyme went public with the promise of making high-volume fuels from algae, but that proved to be a money-losing business, and over the past year, there's been a shift to food products and specialty ingredients, which are lower volume but higher margin. So, TerraVia is the new name and the face of a strategy investors hope works more successfully than its predecessor.

What Q4 2015 looked like While TerraVia lays out its vision of the future, we can't overlook what we know about its past. Its fourth-quarter results show just how difficult it has been to build a sustainable business from bioengineering products. Top- and bottom-line highlights are below:

Metric

Q4 2015

Q4 2014

Change

Total revenue

$10.4 million

$14.5 million

(28.3%)

Net income

($34.7 million)

($44.9 million)

(22.7%)

Earnings per share

($0.43)

($0.57)

(24.6%)

Data source: TerraVia earnings release.

Notice that revenue is down, which isn't good, but some cost reductions are starting to take hold. There's still a long way to go in growing revenue enough to lead to a profit, though, and that's why investors were keying in more on another announcement than on the earnings results themselves.

A partnership that gives TerraVia a baselineTerraVia announced a five-year agreement with Unilever(NYSE:UL), which will provide the company with renewable algae oils for making personal care products. The deal is expected to bring in $200 million in revenue over that time, and is the culmination of seven years of the companies working together.

While TerraVia itself is turning its focus to food products like its new Thrive cooking oil and AlgaVia lipid-rich powder, Unilever will help drive demand in non-food markets. Or at least that's the hope.

Headlines are better than the outlook While traders are busy looking at the potential of the Unilever deal, longtime Solazyme shareholders will know that this isn't the first time the company has made big promises about growth only to fall way short. Nearly two years ago, fellow Fool Maxx Chatsko highlighted the $232 million in revenue Wall Street expected from the company in 2014, only to see it report $60.4 million.

Most recently, Encapso was supposed to provide a high-growth product line to the company, along with a partnership with Flotek Industries. Less than a year later, Encapso is but a memory.

I bring up these two examples to caution against optimism that TerraVia's financial turnaround will be quick. Even with the new Unilever partnership, management expects product revenue to be flat at about $33 million in 2016, and total revenue will only rise slightly to about $50 million. After reporting a $141.4 million net loss in 2015 on $46.1 million in revenue, we're in for another year of heavy losses, Unilever or not.

Be cautious about rising expectations It's easy to get caught up in the potential of TerraVia without considering the reality of where the business actually is. History tells us that expectations for new products are typically higher than the eventual results. That may change with the company's new food and nutrition focus, but it's better to take a cautious approach as 2016 starts, rather than buy into the big headlines.

If TerraVia can execute its strategy and start generating cash from its growing number of products and partnerships, this is still a high-potential stock. But the risks are just as high, which is something to keep in mind today.

Travis Hoium has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Solazyme. The Motley Fool recommends Unilever. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.